In this piece, we will take a look at the ten oversold small cap stocks to buy. If you want to skip what's happening in the market right now and background on small cap stocks, then head on over to 5 Oversold Small Cap Stocks To Buy.
If there's one thing that can be said with certainty right now, it's that the investing climate at the start of August is markedly different than the one during late July. The Federal Reserve, which has been one of the most closely watched institutions (at least in the stock markets), has been making the news for well over a year now with its rapid series of interest rate hikes. These hikes make securing credit harder, and the central bank has been clear in outlining that it will base its decisions on a handful of important economic indicators such as the job creation rate and the rate of price increases also known as inflation.
In July, these data sets seemed to confirm that the previous interest rate hikes have started to make their effects, making it more likely that the bank rate is unlikely to increase rates. In the broader term, stable interest rates, even if they are high, allow small and large businesses to adjust their borrowing needs and working capital financing models. Even if the link between interest rates and stock prices is often subject to debate, the association of easier credit with improved spending from the corporate and consumer ends of the economy is quite intuitive. The more credit a firm can raise, the faster it can increase its share of markets or launch products, and consumers are able to finance purchases through easier credit find it easier to spend on products such as graphics processing units (GPUs).
Even as stock market investors could have taken some solace in knowing that the interest rate hike environment has toned down, rating agency Fitch Ratings was ready to create history and downgrade U.S. government credit for the first time in more than a decade. Fitch's latest warning that it might do so came in 2019, and the latest decision is based on the agency's Sovereign Rating Model (SRM). For the U.S., this rating was adjusted by Fitch's committee based on factors such as a rapid rise in inflation after the coronavirus pandemic and higher volatility in the gross domestic product (GDP).
Macro: A +1 notch adjustment to offset the impact on the SRM from the deterioration of the GDP volatility variable and sharp spike in inflation following the COVID shock and its aftermath, while Fitch continues to believe the U.S. growth outlook remains solid and relatively stable over the medium term.
For those wondering, the SRM itself is a regression model that uses 18 different variables and the committee's Quantitative Overlay (QO) adjusts it to account for factors that are trickier to demonstrate mathematically. The latest QO was based on 11 factors, which highlighted that Governance is weaker than AAA peer countries and high interest rates and low tax receipts have strained public finances. However, the note was also sure to highlight that America has low levels of corruption, it is the world's largest economy, has high GDP per capita, and enjoys strategic advantage of its currency being the most widely held reserve currency.
The news of the rating downgrade was met with strong disagreement from the U.S. government, particularly Treasury Secretary Janet Yellen who cited U.S. GDP growth as evidence of the rating's flaws. Secretary Yellen was also optimistic about the future of U.S. Treasury securities, stating at an event in Virginia that they would continue to be the most preferred safe haven asset in the world. As compared to its European peers, America's economy has shown surprising resilience by managing to avoid a recession.
In fact, optimism is abundant in some quarters, such as the Federal Reserve and Bank of America Corporation (NYSE:BAC). Bank of America, like other banks, has feared that the U.S. economy might tip into a recession due to tighter credit, but it reversed this outlook as August kicked off. Now, the bank feels it is necessary to "reassess our prior view that a mild recession in 2024 is the most likely outcome for the U.S. economy" in favor of positive growth over the time horizon.
Moving towards small cap stocks, these stocks are mostly of firms that are tied more closely to the American economy. This is because these firms have fewer resources to target global markets, and the relative insulation also leads the shares to respond more to domestic economic conditions. In today's era, this can be an advantage since America is one of the few large economies growing in an environment where other developed countries are having difficulty in managing strong growth rates. Additionally, small cap stocks also provide the potential for large profit percentages through share price appreciation, which also leaves them susceptible to equally larger losses and liquidity problems.
With these details in mind, let's take a look at some oversold small cap stocks, out of which the notable names are 2seventy bio, Inc. (NASDAQ:TSVT), TELUS International (Cda) Inc. (NYSE:TIXT), and Harmonic Inc. (NASDAQ:HLIT).
To compile our list of the most oversold small cap stocks to buy, we have narrowed down the top ten companies with an RSI reading of 30 or less, a market capitalization ranging between $300 million to $2 billion, and a Buy or better rating from analysts.
Waldencast plc (NASDAQ:WALD) sells professional skincare products to plastic surgeons, dermatologists, and other doctors. The firm's shares fell considerably in June end, and they have been unable to recover the losses so far. The shares are rated Strong Buy on average primarily due to Telsey Advisory's Outperform rating in March. Raymond James, however, downgraded the shares to Market Perform in July.
As of March 2023, eight of the 943 hedge funds part of Insider Monkey's database had held a stake in Waldencast plc (NASDAQ:WALD).
Along with TELUS International (Cda) Inc. (NYSE:TIXT), 2seventy bio, Inc. (NASDAQ:TSVT), and Harmonic Inc. (NASDAQ:HLIT), Waldencast plc (NASDAQ:WALD) is an oversold small cap stock seeing strong analyst attention.
MSP Recovery, Inc. (NASDAQ:LIFW) is a Florida based company that caused a bit of a stir in May 2022 after its shares tanked to below $3 after the firm merged with a SPAC that was trading above $10 at the time of the deal. The stock has not recovered, and it currently trades in cents. Year to date, the shares have lost more than 80%, and Cantor Fitzgerald, which is the only firm rating the stock, issued an Overweight rating in September 2022.
Insider Monkey took a look at 943 hedge funds for this year's first quarter and found out that six had invested in MSP Recovery, Inc. (NASDAQ:LIFW).
Cambium Networks Corporation (NASDAQ:CMBM) is a technology company that sells networking equipment to businesses in a variety of industries. The firm's second quarter earnings saw it miss analyst EPS estimates heavily, yet four analysts maintained an Outperform rating for the shares in August. The stock is down nearly 50% year to date.
By the end of 2023's March quarter, 11 of the 943 hedge funds part of Insider Monkey's database had held a stake in the company. Cambium Networks Corporation (NASDAQ:CMBM)'s largest hedge fund shareholder is Orin Hirschman's AIGH Investment Partners with a stake of $9.4 million.
Anika Therapeutics, Inc. (NASDAQ:ANIK) is a medical technology company that focuses on developing technologies and treatments aiming at joint preservation. The shares are down 24% year to date and the selloff started in March around the same time period the firm reported a slight annual growth for its fiscal year 2022 revenues but nevertheless missed analyst EPS estimates.
11 of the 943 hedge funds part of Insider Monkey's Q1 2023 research had invested in Anika Therapeutics, Inc. (NASDAQ:ANIK). Out of these, the firm's biggest investor is Douglas T. Granat's Trigran Investments since it owns 1.5 million shares that are worth $45 million.
Impinj, Inc. (NASDAQ:PI) is a technology firm that provides connectivity chips that are used in retailing and warehousing applications. Investment bank Goldman Sachs is quite optimistic about the stock, with its note earlier this year rating the shares as a Buy and setting a $101 share price target. The current share price is $63 and the average share price target is $92.
After sifting through 943 hedge funds for their investments during 2023's first quarter, 28 had bought a stake in the firm. Impinj, Inc. (NASDAQ:PI)'s largest shareholder among these is Daniel Patrick Gibson's Sylebra Capital Management with a stake worth $385 million.
2seventy bio, Inc. (NASDAQ:TSVT), Impinj, Inc. (NASDAQ:PI), TELUS International (Cda) Inc. (NYSE:TIXT), and Harmonic Inc. (NASDAQ:HLIT) are some top oversold small cap stocks.
